The present invention relates to systems and methods for providing electronic trading systems, and more particularly to trading systems that implement a particular feature such as price improvement.
Electronic trading systems provide a platform for which traders can trade items such as financial instruments (e.g., stocks, bonds, securities, futures, contracts, currency, etc.) or household goods (e.g., old records, antiques, sports cards, etc.). In many of these trading systems, bid/offer-hit/lift processes are used to negotiate a sale of a given item. In connection with such processes, traders may submit bids (i.e., prices they are willing to purchase an item) and/or offers (i.e., prices they are willing to sell an item). A trader may respond to bids or offers by submitting sell (or hit) or buy (or lift or take) commands to the trading system. A trade is executed when a trader issues a hit or lift (or take) command in response to a bid or offer, respectively. In other trading systems bids and offers may be automatically matched when at the same price.
The prices at which bids and offers can be submitted usually conform to some sort of fixed interval or increment, where the interval conforms to an established or agreed practice and is set by the trading system, or dictated by the type or price of item being traded. For example, if a trader is trading United States Treasuries in a brokerage trading system, that trader can submit bid or offer prices that some trading systems vary by ¼ of 1/32nd of a point in Treasuries up to a maturity of under 10 years, and ½ of 1/32nd of a point for maturities over 10 years and over. In trading systems for stocks and equities, for example, traders can submit bids and offers that vary by a penny.
Trading systems have been developed that permit traders to submit bids or offers that improve on the price of a particular item by improving on the price within the predetermined pricing increments. Such trading systems employ a trading method commonly referred to as price improvement. Examples of trading systems that use price improvement can be found in U.S. patent application Ser. No. 10/826,779, filed Apr. 16, 2004 (hereinafter “the '779 application”) and in U.S. patent application Ser. No. 10/171,009, filed Jun. 11, 2002 (hereinafter “the '009 application”), both of which are hereby incorporated by reference herein in their entireties.
In general, price improvement enables one or more traders to improve on a price for an item being traded in a market, without having to improve on the price using the predetermined pricing increment. Traders can improve on the price of an item using different price improvement levels. This allows traders to select among different aggressive price improvement increments to price improve, for example, on a bid, offer, buy, or sell price. For example, the trading system may provide several price improvement levels (e.g., four levels) for which the trader can improve the price. The trading system may use these price improvement levels to determine priority of orders in a stack of bids and offers, but not such that they warrant movement to a new standard predetermined trading price increment.
A price improvement level may improve on a particular price at a fraction of the predetermined pricing increment of the item being traded, with the particular price improvement level being a multiple of the fraction. The fraction of the standard increment may depend on the particular price improvement level chosen (e.g., a price improvement level of one, two, three, etc.). For example, the two-year United States government bond may trade at standard increments of ¼ of 1/32 of a nominal value. Thus, trading two-year U.S. government bonds with price improvement enables a trader to submit an order that slightly improves on a price at a fraction of the (¼ of 1/32 for a 2 year maturity) predetermined pricing increment. Assuming for example that the price improvement increment is equivalent to one eighth of the predetermined pricing increment, a price improvement level of one may improve the price by one eighth of the (¼ of the 1/32) predetermined pricing increment, and a price improvement level of three may improve the price by three eighths of the (¼ of the 1/32) standard increment.
Another price improvement level includes use of dynamic BEST price improvement level (hereinafter “dynamic price improvement”). Orders submitted using dynamic price improvement maintain a predetermined position within a trading stack until matched or cancelled. A dynamic price improvement order has a price improvement level and a timestamp. The price improvement level is a non-traditional price improvement on a traditional price increment such as the level one, two, or three price improvement level, as discussed above. The timestamp indicates the time at which the dynamic order is submitted, and may be used to establish priority over other orders that have the same price improvement level, including other dynamic orders.
A dynamic price improved order can increase or decrease its price improvement level depending on market conditions. This creates a trading scheme in which the dynamic order changes its price improvement level to maintain its position relative to the other orders in the stack, thereby maintaining its position in the stack. For example, if a trader submits a dynamic order and that order is placed at the top of the stack, this order maintains its position at the top of the stack, while the price of the item being traded is maintained at its predetermined price increment price, by adjusting its price improvement level (e.g., increase its price improvement level such that it exceeds the price improvement level of the next best order by one level) until it is matched with a contra order or cancelled.
The dynamic order may increase its price improvement level up to a maximum available price improvement level, at which point it may use its original timestamp to maintain its position at the top of the stack where the timestamp is older than subsequent orders.
The presence, or not, of dynamic price improvement (PI) orders in the stack may cause the system to decrease the price improvement level of certain price improved orders submitted subsequent to dynamic PI orders such that the price improvement level of the dynamic PI orders are not inflated when such inflation is not needed to maintain their respective positions in the stack. Thus, this avoids using unnecessary price improvement levels on orders that cannot improve their position in the stack by virtue of the pre-existing dynamic price improvement order. For example, assume that a dynamic order is in a stack with a price level of two. Then a trader submits a new price improved order with a price improvement level of three, which in this case is assumed to be the maximum price improvement level. Instead of increasing the price level of the dynamic PI order to three, the system may decrease the price level of the new price improved order to two. This way, the dynamic PI order still maintains its position in the stack, but does not have its price improvement level increased to three. Thus, such functionality prevents unnecessary inflation of price improvement levels.
A known consequence of using price improvement is that it may result in situations in which all bids or offers in the stack use price improvement, resulting in a stack arrangement that is the same as if the system does not have price improvement functionality. In some situations, traders may prefer to trade at standard pricing increments and not pay any price improvement increments to retain a certain position in a trading stack.
In other situations, traders may wish to participate in a trading system that uses a new feature such as price improvement, but would like to have an option to opt out of participating in the trading rules and/or scheme governing the new feature.
Therefore it is an object of the invention to provide systems and methods to allow certain traders to trade at the predetermined pricing increments, but also do not have their orders automatically passed over by price improved orders in a trading system that uses price improvement functionality.
It is also an object of the invention to provide systems and methods that allow traders to opt out of being subjected to the trading rules and/or scheme governing a particular feature, yet still permit traders to engage in competitive trading.